Lion Nathan National Foods FY10 Result

Lion Nathan National Foods (LNNF) today announced its financial results for the 2010 financial year in conjunction with Kirin Holdings’ full year announcement.

Alignment of reporting year ends to September 30 2010 means the full year results represent a full twelve months for the Lion Nathan (LN) business unit* (October 2009 to September 2010) and nine months for the National Foods (NF) business unit (January to September 2010). NF’s October to December performance was disclosed on 10 February 2010.

LNNF continues to invest in its people and a focussed portfolio of core high potential brands to drive sustainable results in the long term. Business integration continues to progress to plan.

Like most operations in the retail and consumer goods sectors, LNNF’s key business units experienced increasingly tough market conditions in the second half of the financial year. A confluence of poor weather, tighter fiscal conditions due to rising interest rates and a lack of stimulus and also utility price rises combined to dampen consumer spending and reduce the rate of growth achieved in the second half after a relatively strong start to the year.

Lion Nathan

Over the year, LN[1] delivered operating earnings before interest and tax (EBIT) of $597.7 million, an increase of 7.3%.

The second half was characterised by strong competitive activity which failed to stimulate volume growth. Despite a strong start, at the end of the year the market was broadly flat in volume terms.

LNA’s ‘master’ brand portfolio continued to grow its share of portfolio mix and now represents 82% of total volume. XXXX Gold continued its impressive growth. The Hahn Super Dry trademark also had a particularly strong year with volume growth of 31% off a large base. Recent innovations XXXX Summer Bright Lager and Tooheys Extra Dry 5 Seeds are now firmly established in the marketplace with both brands exceeding launch expectations. The Boag’s portfolio continues to grow, benefiting from the reach of LNA’s route to market and a significant increase in marketing investment. James Boag’s Premium volumes grew by 21%, while Boag’s Draught grew 11%.

Lion Nathan New Zealand (LNNZ) performed well in challenging market conditions which were exacerbated further by poor weather and the Christchurch earthquake. Total revenue grew by 4.4% to NZ$612.7 million.

The core beer business grew revenue by around 1% against the prior year, realising value in a market in which volume declined overall. Steinlager Classic was a standout performer with double digit value growth, supported by a packaging refresh. The Wines, Spirits and RTD businesses benefitted from the acquisition of distribution rights for Bacardi brands and the successful launch of Mac’s Isaac’s Cider, which has driven strong cider category growth in the New Zealand market.

Conditions in the global wine industry remain very challenging with the economic slowdown combined with an oversupply of grapes putting downward pressure on pricing in domestic and international markets. The strong Australian dollar continued to undermine performance in key export markets. Despite the new acquisitions, wine remains a relatively small part of LNNF’s business and the company remains focussed on driving improved returns from its existing asset base as opposed to transformational growth.

After the conclusion of the financial year, the Company acquired wine brands from Pernod Ricard, including popular sparkling wine brand Lindauer.

LNNF CEO, Rob Murray said: “Our alcohol businesses delivered a solid performance against the backdrop of increasingly challenging market conditions. Consumers continue to trade up to more premium brands and this is driving revenue growth.”

National Foods

While the NF business continues to make progress towards its integration goals, conditions in both the dairy and juice sectors remain very challenging for farmers and producers alike.

While revenue for the 9 months to September declined 5.8% to $2.32 billion, this was impacted by the divestment of the Freshco and Ski assets. Despite an increase in operating EBIT to $99.9 million, the business is still some way from achieving acceptable margins and faces some considerable headwinds. While they have moderated, input costs remain relatively high by historical standards and the business faces ongoing challenges to maintain adequate operating margins in a very competitive retail environment.

NF increased focus on brand investment delivered some significant successes during the year. Dare Iced Coffee was one of the fastest growing NARTD brands in the convenience market, delivering volume growth of 30%. Yoplait Formé launched its ‘Satisfy’ range which saw instant success and cemented the brand as the leading weight-management brand in yoghurts.

NF Managing Director Andrew Reeves said: “While the results are an improvement against the prior year, the business is still some distance from delivering an acceptable profit margin. National Foods intends to remain focussed, continue our integration progress and invest in our strategic assets to create a business fully focussed on the needs of customers and consumers.”

Management changes

Earlier in the week, LNNF announced management changes relating to NF and LNNZ and Global Wine.

Peter Kean, currently Managing Director of LNNZ and Global Wine businesses has been appointed Managing Director NF, from 1 April 2011.

Peter Kean will take over from Andrew Reeves, who is leaving the business to take on the role of CEO for George Weston Foods, based in Sydney.

An announcement on Peter Kean’s successor will be made in due course.

Outlook

Since the end of the year, market conditions for both all key business units have further eroded.

NF continues to experience significant margin pressures in both dairy and juice. Since the end of the year, the white milk market has seen deep discounting on private label and control brands which threatens to further dilute the profit pool available to all players in the supply chain.

Recent weather events have directly impacted key LNNF production facilities and prevented distribution to affected areas. Reflecting the iconic status of our business, particularly in Queensland, the Company has made an investment in aiding the recovery and providing support to its key stakeholders – suppliers, customers and consumers – through a range of programmes.

LN also recently conducted a recall on select batches of key brand Boag’s due to a packaging fault during the peak summer sales period. While significant effort was made to minimise impact on supply, the company is currently assessing the scale of the financial impact.

LNNF CEO Rob Murray said: “Rising interest rates and the ongoing economic uncertainty have had an impact across the FMCG and retail sectors in both Australia and New Zealand. Since the end of the year, this has been compounded by a series of weather events, particularly in Queensland which is a relative stronghold for our business.”